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Distribution of the 2001-2006 Tax Cuts

Updated Projections, July 2008

Greg Leiserson, Jeff Rohaly

Published: July 22, 2008
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The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

The text below is an excerpt from the complete document. Read the full report in PDF format.


Abstract

Since 2001, Congress has passed a major tax bill almost every year. Most have reduced taxes significantly and, since they were not accompanied by spending cuts, the resulting deficits have increased the national debt. The tax cuts total almost $2.2 trillion over ten years, and that total may be vastly understated if some or all of the cuts are extended beyond their scheduled expiration date of 2010. In addition, the cuts exacerbated the growing problem of the alternative minimum tax (AMT). Barring legislative action, more than 33 million taxpayers will fall prey to the AMT in 2010.


Introduction

Since 2001, Congress has passed a major tax bill almost every year. Most have reduced taxes significantly and, since they were not accompanied by spending cuts, the resulting deficits have increased the national debt. The largest revenue loss—$1.35 trillion over ten years—came from the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) reduced revenues by another $350 billion (again over the subsequent decade). Subsequent legislation cut taxes further: $146 billion in 2004 (WFTRA), $142 billion in 2006 (TIPRA and PPA), $51 billion in 2007 (TIPA), and $125 billion in 2008 (ESA). The tax cuts total almost $2.2 trillion over ten years, and that total may be vastly understated if some or all of the cuts are extended beyond their scheduled expiration date of 2010. In addition, the cuts exacerbated the growing problem of the alternative minimum tax (AMT). Barring legislative action, more than 33 million taxpayers will fall prey to the AMT in 2010. It is highly unlikely that Congress will allow this to happen but simply extending the AMT “patch” through the end of 2010 would add another $207 billion to the cost of the tax cuts.

As Congress and the new President consider whether to extend some or all of the tax cuts, they should take into account the distribution of the tax cuts and how that distribution would change if the cuts were combined with measures to finance the resulting budget deficits. Although the long-term distributional effects of the 2001-06 tax cuts will depend on how they are ultimately paid for, the immediate benefits are skewed in favor of high-income taxpayers. In 2010, when the cuts are fully phased in, households in the middle fifth of the income distribution will receive an average tax reduction equal to 2.6 percent of after-tax income. Households in the top quintile—the 20 percent of the population with the highest incomes—will receive an average tax cut that is more than twice as large: 5.4 percent of income. Those in the bottom quintile will get an average cut equal to just 0.7 percent of income. Taxpayers at the very top of the income scale benefit the most. Those in the top one percent will receive a 7.3 percent average increase in after-tax income in 2010; those in the top one-tenth of one percent—the richest 1 in 1,000 taxpayers—will see their after-tax incomes rise an average of 8.2 percent.

Over the long-term, Congress must finance tax cuts through spending reductions, other tax increases, or a combination of the two. The financing approach chosen will significantly affect the ultimate distributional impact of the cuts. For example, if the revenue loss from the 2001–06 tax cuts and an accompanying fix for the AMT were offset by an additional tax levied in proportion to income, the combination would transfer after-tax income from the poorest four-fifths of households to the richest fifth. Only taxpayers in the top quintile of the income distribution would, on average, receive an increase in after-tax income. Average after-tax incomes would fall for households in the bottom eighty percent of the income distribution. Households in the lowest quintile would face an average tax increase equal to 2.6 percent of after-tax income whereas taxpayers in the top quintile would see a tax cut equal to 1.0 percent of income on average. Taxpayers in the top one percent would see an average tax reduction equivalent to 2.6 percent of income.

This paper summarizes the Tax Policy Center’s (TPC) latest estimates of the distributional impact of the 2001–06 tax cuts. We include the impact of all major individual income and estate tax provisions in the seven tax acts. Our distribution tables include individual and corporate income taxes, payroll taxes for Social Security and Medicare, and the estate tax. More information and additional detailed distribution tables can be found on our web site at http://www.taxpolicycenter.org.

(End of excerpt. The entire report is available in PDF format.)